ARPA: No kiss and tell here: Krupp and the history of German capitalism

Harold James Krupp: A History of the Legendary German Firm, Princeton, Princeton University Press, 2012 (360 pp). ISBN 9-78069115-340-7 (hard cover) RRP $70.95.

William Manchester first published The Arms of Krupp in 1964 (Manchester 1968). In 1965 in West Germany the National Democratic Party (NPD), rightwing and widely regarded as neo-Nazi, passed the five per cent cut off for proportional representation in state elections in Hesse and Bavaria, and appeared to be heading for representation in the Bundestag. Could it happen again? Many argued that flaws in the German national character had predisposed Germans to authoritarian rule. Others held that Hitler’s rise to power had been abetted by wealthy industrialists, particularly in the ‘heavy’ industries of coal, iron, and steel. The argument went that industrialists, being German, shared that authoritarian streak. Being wealthy, they aided rightwing parties, in particular the Nazis. Being industrialists, they profited from rearmament, from war, and from the crimes committed by the Nazi regime.

Foremost among the accused was Krupp, the face of the German armaments industry. In 1945 Gustav Krupp, the ‘cannon king’, was judged too old and mentally infirm to stand trial, but his son Alfried and members of Krupp’s board of directors were tried as war criminals. Acquitted of actual responsibility for the war, they were convicted of plundering occupied territories and exploiting slave labour. In 1948 Krupp was sentenced to twelve years imprisonment, and his entire fortune confiscated. Manchester’s account placed Krupp hand in glove with German militarism. He, of course, accepted the Nuremberg judgments as valid, and he worked backward from the ‘mountains’ of trial records to trace the history of the firm and the tale of complicity in Germany’s warlike past. In the context of the nervous 1960s, the book presented a dramatic, well written account that confirmed what many both in and out of academia believed, and it sold well enough to make many in academia jealous.

FROM MANCHESTER TO JAMES

Now in 2012, as the firm celebrates its 200th anniversary, we have Harold James’ Krupp: A History of the Legendary German Firm. Lacking a bibliography and sparsely footnoted, it runs to 360 smallish pages compared to Manchester’s 976 large ones. James’ style is academic in the bad sense (‘Since the late 1880s, an appreciable distance had been growing between Friedrich Alfred Krupp and his wife Margarethe’ [p. 117] is his leaden formulation of the marriage of the man Manchester calls ‘the Oscar Wilde of Germany’). James is a professor at Princeton, and the book is published by Princeton University Press. However, the copyright is owned by the Krupp Foundation, and James thanks them for their financial support. In sharp contrast to Manchester, James’ account of the Nuremberg trials (pp. 223–225) is highly critical. The attempt to try the aging and infirm Gustav as a major war criminal, says James, ‘turned into a fiasco’. The subsequent trial of Alfried and the Krupp directors showed ‘many and in some instances multiple violations of standard judicial practice’. Alfried’s ‘involvement in business decisions’, according to James, ‘was never clearly delineated’. The case against Krupp, James concludes, ‘focused on the assertion, implausible even at the time, that corporations such as Krupp had put Hitler in power’. Indeed, ‘the idea that Krupp had been a driving force behind the high-level making of Nazi policy … was an absurd fantasy derived from a pre-existing view of the iconic and national character of the enterprise’.

As it happened, Krupp did not languish long in the Landsberg prison. ‘The Ruhr business elite was scandalized by the severity of the sentences’, James tells us. A campaign began, and two of Krupp’s lawyers wrote a brief, expanded into a book by an associate of theirs, arguing against the decision. However, the associate was a prominent Nazi legal expert, and so the book was published under the name of Gustav Krupp’s bother-in-law, who had nothing to do with its writing, but had been imprisoned after the 1944 plot against Hitler. Thus sanitised, the book convinced Chancellor Konrad Adenauer of Alfried’s innocence, and may have influenced John McCloy, the Allied High Commissioner, who in 1951 pardoned Alfried and restored his fortune (p. 229). This fitted a pattern of pardoning or not prosecuting business leaders considered essential to the rebuilding of the West German economy, for instance Herman Abs, President of the Deutsche Bank, which managed Hitler’s personal account and funded the industrial plants surrounding Auschwitz, including those used by Krupp. James does not hide the details of Krupp’s connections with the Nazi regime (chapter 6), although the treatment is sparse, compared to Manchester’s—whose details will disturb your sleep. James allows that Krupp profited from ‘the armaments economy’ and that ‘its treatment of slave workers was vile’, but he nevertheless finds it unjust that ‘the company was fragmented, its management convicted, and its owner expropriated’ (p. 225). He moves direct from Alfried’s pardon to the ‘impossible task’ of recreating ‘a German aquarium’ from the ‘fish soup’ left by the Allies’ policies (pp. 230–231).

Manchester came to bury Krupp; James comes to praise. In addition however, the two books reflect their different contexts. The NPD won 4.2 per cent of the national vote in 1969, safely short of the five per cent required to secure Bundestag representation, and then disappeared. No other significant rightwing group has emerged since. A lot of water had already flowed under the bridge, and a lot more has flowed since. As historians have colonised territory formerly occupied by political science, perspectives have shifted. In the mid-1960s the historian’s task could still be conceived as the need to explain the rise of Nazism. Answers varied, but they circled around various conceptions of German uniqueness, the idea that there was something different and strange about Germany. Now, another forty years on, with no rightwing party having approached even the levels of the now-vanished NPD, and Germany’s continued leading role in the European framework, another question arises. To many, it now seems as important to explain the downright normality of the sixty-odd years since 1945 as the abnormalities of the twelve years from 1933 to 1945. Correspondingly, explanations of the rise of Nazism have become much more contingent, focused on the impact of the First World War, Weimar, and the depression of the early 1930s, and analyses of the crimes of the Nazi regime focus less on pre-determined pathways or programs and more on the internal dynamics of government and party organisations and the context of war and expansion (see Tipton 2003; Hagen 2012). Thus, for James, Krupp was not uniquely guilty, but rather ‘a participant in a massive web of ideologically driven immorality’ (p. 225).

FROM NAZISM TO RHINELAND CAPITALISM

If Nazism was an aberration, however horrible, then there is nothing inherently ‘wrong’ with Germany or the course of German history. And if this is so, then there may be room for another project, the search for potentially valuable models in the German experience. James believes that German business, and Krupp in particular, have something important to teach business leaders in other countries. Three themes, he says, were ‘hardwired into the corporate culture that became a sustaining vision’. First was ‘the absence of an exclusive focus on profitability’. Second was the idea that ‘a technically advanced enterprise exists in an international and even global system’. Third was that ‘the enterprise lived in a perpetual tension between the story (occasionally very dramatic) of family ownership and the establishment of a complex business organization’ (pp. 4–6).

James believes there is ‘a particular German way of doing business’ (p. 3), but he does not cite the literature on European management at all, apart from one older popularisation (Albert 1993). In fact for students of comparative management the ‘Rhineland’ model and the opposed ‘Anglo Saxon’ model are the two axes of analysis and have been for some time (see Koen 2005). ‘Rhineland’ firms include those from the Low Countries, Scandinavia, Austria and other central European countries as well as Germany, and many consider Japan a Rhineland country as well (see Tipton 2007, ch. 2). Rhineland firms are ‘stakeholder’ firms. Their decisions are influenced by a range of significant groups, including major shareholders, but also workers, local communities, other firms in the industry, financial institutions, and government agencies. Governance structures vary but often require two boards, a management board whose members are appointed by a supervisory board that includes representatives from these stakeholder groups. In Germany, in particular, it is compulsory under the 1973 Co-Determination Law for firms with more than 2,000 employees to have a supervisory board with half its members drawn from among workers’ representatives, and local works councils are compulsory and have the right to negotiate on hiring, training, and dismissal in most Rhineland countries.

Rhineland firms typically rely on banks for finance, and the banks in turn are represented on the supervisory boards. Share markets are thin and illiquid. Shareholdings are concentrated. Firms in the same industry may hold shares in each other, or as in Japan in other firms within organised groups. In the late 1990s some 90 per cent of listed firms in Germany had a shareholder with at least a 10 per cent stake, and firms, banks, and government agencies together held over 40 per cent of the shares of all listed firms. These shareholders are ‘patient’, committed to the firm, and unlikely to sell. Rather, in difficult times they ‘express concern’ (Koen 2005, pp. 268–269) to the supervisory board. Firms, with encouragement from their banks and support from their governments, collaborate with each other, for instance to avoid plant closures that would damage the surrounding communities. In hard times both German and Japanese law permit the formation of ‘emergency cartels’ to manage threatened industries. Patient shareholders and connections to local communities are linked as well to the habit of Rhineland firms of investing heavily in training for their workers. Workers respond by staying with the firm. In the Japanese case this takes the extreme form of lifetime employment for the male employees of the core firm. In Western Europe intensive training leads to experienced workers being able to act on their own initiative, to undertake repairs for instance, and therefore these firms have relatively flat management structures and wide spans of control.

Anglo Saxon firms, from Britain and especially the United States, but also including Canada, New Zealand, and Australia, do not represent stakeholders; the creation of value for shareholders is the firm’s only purpose. Banks exist at arms’ length; debt is viewed with suspicion, and funding is raised usually through new share issues. Capital markets are broad and liquid, and shareholders are ‘impatient’ and indifferent as to which firms’ shares they hold. Cross shareholdings may be illegal. Firms are independent. Cartels are illegal, as are agreements to fix prices or divide markets. In theory poor performance is punished as shareholders sell their shares, and as the share price drops, the firm’s managers will either improve performance, or the firm will be taken over and they will lose their jobs. One way to improve performance is to reduce the firm’s headcount. Anglo Saxon firms do not invest in their employees, for fear that a competitor will poach them, they dismiss workers as business declines, and they assume that as business improves there will be a supply of sufficiently skilled workers available to hire. Since workers are not highly trained or experienced, they cannot be allowed wide discretion, and so the typical Anglo Saxon firm has a tall structure, with only narrow spans of control at each level.

FROM HARDWIRED CORPORATE CULTURE TO CORPORATE STRATEGY

For well over a century now, Krupp has been one of the largest, and sometimes the very largest, firm in Germany, and therefore it is an eminently appropriate case for study. However, and this is the real tragedy of James’ lack of engagement with the literature, it is difficult to say what this case tells us, for Krupp, on the evidence, is not a ‘Rhineland’ firm at all. Taking the elements James identifies as ‘hardwired into Krupp’s corporate culture’ in reverse order, Krupp remained a family firm to the end. Stakeholders were never represented, unless forced upon the firm by government intervention. Successive generations of Krupps viewed their bankers with hostility. Krupp’s paternalistic tradition arose from the firm’s desire to hold workers skilled in its particular processes, not from recognition of the workers as a legitimate voice in management. James’ mentions co-determination only twice, once in the early 1950s when Krupp used the threat to pension entitlements as an argument against the breakup of the firm (pp. 236–237), and again in the 1990s when divisions were spun off explicitly to avoid the requirements of the law (p. 279). Symptomatically, the longstanding consumer co-operative was sold without consultation (p. 260).

The continuity is striking. Alfried hired men who would re-create what had been, and one of them, Berthold Beitz, said in 1961 at the firm’s 150th anniversary, ‘The performance of yesterday is … the basis for the performance of tomorrow’ (p. 247). Through the 1950s and 1960s Krupp appears to have lagged in adopting new technology (p. 246), partly because the firm remained ‘centrally organized and controlled’, never moving toward a multidivisional structure (p. 247). James’ focus stays at the top, with chapters framed around successive generations of Krupps. He has quite a good collection of novels and films that reference the Krupps, but there is no kiss and tell here, and not much kissing in any case, for bluntly the Krupps are not an especially interesting lot. One of the two exceptions is Friedrich Alfred, who did (Manchester) or probably did not (James) commit suicide in 1902 when his villa on Capri was publicised as a gay hideaway, which it was (Manchester) or may not have been (James). Again James ignores the context and the literature. Friedrich Alfred belonged to the well recognised Capri community of wealthy northern Europeans, whose interest in Classical antiquity often masked their relations with young Italian men (Aldrich 1993, pp. 127–128, 162–163). James emphasises that Emperor Wilhelm II defended Friedrich Alfred and marched in his funeral cortege, but the Emperor faced his own Oscar Wilde moment in 1907 when his friend and advisor Philip Eulenburg was tried for perjury related to his ongoing homosexual relations with other members of the Emperor’s entourage.

The other interesting Krupp, Alfried’s son Arndt, who by this time was not a Krupp but a von Bohlen und Halbach, appears in 1966, when Alfried became determined not to allow the firm to pass to him because his ‘ostentatious and hedonistic life as a homosexual playboy’ violated the Krupp tradition. Beitz negotiated a settlement including an annual income of two million marks for Arndt, and ownership passed instead to the Krupp Foundation (pp. 261–262). This was not original; the use of a foundation as a ‘poison pill’ defence against takeover had a number of high profile precedents in Germany. Then, following Alfried’s death in 1967 Beitz successfully excluded Krupp (that is, von Bohlen und Halbach) family members from the foundation and engineered the dropping of the Deutsche Bank’s Abs from Krupp’s supervisory board (pp. 267–268).

Astonishingly Beitz, born in 1913, remains today the chair of the board of the Krupp Foundation. The German language Wikipedia biography notes that he is also the legal counsel (Sachwalter) representing the ‘Krupp fortune’, a detail that James does not include (Wikipedia 2012a; Wikipedia 2012b). The Wikipedia bio also tells us that Beitz served as chair of Krupp’s supervisory board until 1989, when he became the Honorary Chair. These and the following years would have continued the story Manchester had to tell, for as The New York Times said in its review of The Arms of Krupp, ‘To be the biographer of Krupp is to write the history of modern Germany’, and as noted above these superficially ‘normal’ years cry out for analysis. There is also the story of the ‘rationalisation’ of West German heavy industry, which cost tens of thousands of jobs through the 1990s, but has been severely neglected as attention has concentrated on reunification. Wikipedia identifies Beitz as one of the key participants in this process. Wikipedia also claims that Beitz is famous for his non-analytical, intuitive personal management style, and repeats his own claim that he is completely apolitical. Again James disappoints, and never examines Beitz, the dominant figure whose philosophy has guided the firm since the 1950s, and never in fact looks inside the firm. We see only summaries of press accounts. Picking up in 1961, the final 48 references contain only four sourced from the Krupp archives. The others almost all come from Der Spiegel or the financial press, and the discussion remains predictably superficial.

The question of the firm’s structure raises the issue of Krupp’s strategy. Under Beitz’s leadership, James says, Krupp ‘re-globalized’. However, as in previous chapters James accentuates the positive, and equates ‘globalization’ with exports. Again the absence of familiarity with the literature weakens his argument. Standard international business theory identifies export as only the first stage of a firm’s internationalisation. Under Beitz, Krupp sold a few turnkey factories, including a moderately successful plant in Brazil and an unsuccessful project in India (pp. 249–251). Why was Brazil not more successful, and what happened in India? Alice Amsden (2001) has emphasised the difficulties of technology transfer, and it seems there must be something in the Krupp archives that would allow an analysis of these and other projects. For the rest, it remains an open question whether Krupp ever became more than the sum of its many separate parts.

Krupp expanded in the 1990s, in two large gulps. In 1991 Krupp launched a bid for Hoesch, one of the first major hostile takeovers in German history. Echoing the tradition of reluctance to rely on German banks, nearly a quarter of the funding came from the government of Iran, a connection Beitz had pursued since the 1970s (pp. 277–278). In 1997 Krupp bid for Thyssen, supported by a reported 18 billion mark credit arranged by Deutsche Morgan Grenfell and Goldman Sachs, about three times Krupp’s existing capitalisation. Public opinion opposed this as ‘Anglo-Saxon capitalism’ the Deutsche and Dresdner banks ‘hesitated’, and the deal collapsed. However, in 1999 Krupp and Thyssen merged as ThyssenKrupp, with Krupp valued at one third the total (pp. 279–281). Wikipedia tells us that Beitz became Honorary Chair of the merged firm, and fifteen year later he continues to serve. The Krupp Foundation increased its share from 17 to 25 per cent, and in 2007 received the permanent right to nominate three members of the supervisory board. James quotes an analyst who said this poison pill ‘stunts the rightful influence of other shareholders’ (p. 283). Internally, there have been attempts to structure the group into product divisions, but it is not clear whether these have bridged the gaps separating the Krupp, Hoesch, and Thyssen elements. Judging from James’ very sparse presentation, and the firm’s current statements, ThyssenKrupp does not appear to have a separate international division, or ever to have considered the division of the world by product or by region. Foreign subsidiaries appear separate from each other, ruled from the centre in the multi-domestic pattern typical of numbers of European firms and rooted in their early histories in the protectionist 1920s and 1930s (Bartlett, Ghoshal & Birkinshaw 2004).

Finally, profit. For generations the firm was secretive. The huge grotesque Villa Huegel proved a poor home, but useful to entertain foreign visitors who otherwise might have peeked at something in the works (p. 83). What they would have peeked at remains obscure. Reviewers of Manchester complained that despite the book’s length he never quite said what made Krupp’s products superior. James, with access to the archives, might have rectified that, but does not. The products are labelled, but the processes and the internal organisation of the plants are not analysed. The firm was also narrowly competitive. Germany in the early twentieth century was the ‘land of cartels’, but Krupp refused to participate. Alfred (he Anglicised his name to appeal to British customers) rejected the ‘German’ solution of cartel agreements to maintain prices. As he wrote in 1880, ‘I hate the idea of fraternization with our competitors, since nobody will do anything for us, and everyone will want to derive some benefits from such fraternization’ (p. 43). In the 1920s Gustav rejected pleas that the firm join the newly formed Vereinigte Stahlwerke. Rather, as Alfred had said long before in 1846, the firm would target markets where the customer base was limited, which meant firstly, transportation, and, increasingly, the military. ‘It is not our purpose to ruin our competitors, but rather to make as much money as possible. In our interest, we must keep the prices sufficiently high, that the product remains priceworthy and that sales and profit are in an adequate relationship’ (p. 44).

This and other passages sit oddly with James’ repeated insistence that the firm did not care for profit. The wholesale sackings in the 1990s also undercut the claim for a moral commitment to the firm’s loyal workers. Krupp has been consistent, but rather than an ethical vision, it seems its strategy arose from fairly standard considerations. Michael Porter’s classic work identified the five forces with which any firm must contend: customers, suppliers, competitors, new entrants, and substitute products (Porter 1980; see Koen 2005, ch. 10). Krupp, it appears, developed products its competitors and potential new competitors found difficult to imitate, products that had no ready substitutes. Krupp controlled its suppliers, acquiring sources of raw materials and holding its workers with a combination of welfare and repression. That left the fifth force, and the firm concentrated on its customers: from the 1860s through the 1930s, this meant the state. Favour was offered, and reciprocated, under Prussia, under the Empire, under Weimar, and under the Third Reich. As Manchester said, there was ‘nothing quite so phenomenal as this habit of matching the Teuton mood of the moment’ (1968, p. 4). But this seems much less threatening now, and in fact looks less like dark conspiracy and more like a fairly standard case of basic strategic theory under a sovereign risk constraint. For more than half a century the firm has prospered under the Federal Republic, living with its worker representatives on the supervisory board, and as appears from the press accounts cited by James, benefiting from subsidies as the German steel industry was rationalised.

Does this indicate that we need to rethink the special nature of Rhineland firms, or are they simply firms like all firms, embedded in their local institutional contexts (see Mintzberg, Ahlstrand & Lempel 2005)? Does the history of Krupp speak to current efforts to stimulate entrepreneurship in the EU and elsewhere? How ‘entrepreneurial’ and how talented were the Krupps, as opposed to being adept at currying official favour (see Sarasvathy 2009)? Does ownership of firms by charitable foundations preserve the benefits of family ownership while avoiding the pitfalls, as James wishes us to conclude (pp. 293–294)? More to the point, how has the personality of Berthold Beitz influenced the firm, and what follows when he finally departs the scene? These are all important questions, for Krupp, for Germany, for Europe, and arguably for the world. However, without an engagement with the literature, and without more time in the archives, James cannot pose them, let alone offer any sort of persuasive answers.

REFERENCES

Albert, M. 1993, Capitalism Against Capitalism, trans. Paul Haviland, Whurr, London.

Aldrich, R. 1993, The Seduction of the Mediterranean: Writing, Art and Homosexual Fantasy, Routledge, New York.

Amsden, A.H. 2001, The Rise of ‘The Rest’: Challenges to the West from Late-Industrializing Economies, Oxford University Press, Oxford.

Bartlett, C.A., Ghoshal, S. & Birkinshaw, J. 2004, Transnational Management: Text, Cases and Readings in Cross-Border Management, McGraw Hill/Irwin, New York.

Hagen, W.W. 2012, German History in Modern Times: Four Lives of the Nation, Cambridge University Press, Cambridge.

Koen, C.I. 2005, Comparative International Management, Maidenhead, McGraw Hill Education.

Manchester, W. 1968, The Arms of Krupp 1587–1968. The Rise and Fall of the Industrial Dynasty that Armed Germany at War, Little, Brown & Co., London.

Mintzberg, H., Ahlstrand, B. & Lempel, J. 2005, Strategy Safari: A Guided Tour Through the Wilds of Strategic Management, Prentice Hall Europe, Hertfordshire.

Porter, M.E. 1980, Competitive Strategy: Creating and Sustaining Superior Performance, Free Press, New York.

Sarasvathy, S.D. 2009, Effectuation: Elements of Entrepreneurial Expertise, Edward Elgar, Cheltenham.

Tipton, F.B. 2003, A History of Modern Germany Since 1815, Continuum, London, and University of California Press, Berkeley.

Tipton, F.B. 2007, Asian Firms: History, Institutions and Management, Edward Elgar, Cheltenham.

Frank B. (Ben) Tipton is Professor Emeritus of International Business at The University of Sydney. Trained at Harvard University under Nobel Prize winning economist Simon Kuznets and economic historian David Landes, he is the author of seven books and some fifty articles. His recent books include A History of Modern Germany Since 1815 (Continuum & University of California Press, 2003), and Asian Firms: History, Institutions and Management (Edward Elgar, 2007). He continues to teach comparative international management at The University of Sydney Business School.

View other articles by Frank B. (Ben) Tipton:

‘The Most Feared Disease of Childhood and Adolescence’ and ’A Deafening Silence’: Polio and Post-polio in Australia (Digest, Feb 2016)
Big Fish from Little Ponds: Solvay, Belgium, Global Markets, and Family Firms (Digest, Oct 2015)
Asian Business Systems, National Cultures, and the Problem of Genders (Digest, May 2015)
Disruptive Technologies, Strategic Plans and the Art of Comparative History (Digest, Jun 2014)
Capitalist Good Guys: Bankers, Businessmen and the US Political System (Digest, May 2014)